Despite the increasing sophistication of Finance in the past 30 years, quantitative tools for building portfolios remain entrenched in the paradigm proposed by Markowitz in 1952; these tools offer investors a trade-off between mean return and variance. However, Markowitz himself was not satisfied with variance, which penalizes gains and losses equally. Instead, he preferred semi-variance, which penalizes only losses.
May 19, 2012
2012 Working Papers
(revised from working paper # 2011-01)